Inflation Spike Pressures Paraguay Central Bank to Boost Rates

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If the biggest surge in consumer prices in almost 14 years further erodes inflation expectations, the central bank will keep raising borrowing costs.

Since the start of its tightening cycle in August, the central bank has lifted its benchmark interest rate by 600 basis points. Inflation shot up 11.8% last month, almost three times the central bank's 4% target and one of the highest in the region.

A member of the central bank's board of directors said that future interest rate increases might be smaller than recent hikes.

Since we adopted inflation targeting in 2011, we haven't had an increase in inflation like this.

Like most economies around the world, the South American nation was already battling rising consumer prices from the pandemic recovery when Russia invaded Ukraine. The worst soy harvest in two decades caused the central bank to slash its growth forecast for the year to almost zero.

The central bank's chief economist said in an interview that inflation probably won't peak until the second half of the year. In an April survey of analysts by the central bank, they predicted 4.6% inflation in 18 to 24 months, up from 4% in December.

The monetary policy addresses the concern of aligning expectations again.

FX Intervention

The guarani appreciated against the U.S. dollar this year due to higher local interest rates and central bank intervention in the currency market. In the first four months of the year, the monetary authority made almost $342 million in discretionary dollar sales, compared to $355 million for the entire year.

Mora said that the central bank sought to mitigate the effects of the war in Ukraine, the interest rate outlook in the U.S. and market expectations that a bad soy harvest would reduce dollar inflows.

He said that it was opportune to keep the exchange rate stable.

There are other key points from the interview.

• The central bank has put in place a task force to study the regulation of digital assets including cryptocurrencies in Latin America, Colman said
  • The central bank is not expecting to publish regulations for digital assets this year, he said
• The task force is also evaluating the creation of a central bank issued digital currency, or CBDC, to encourage financial inclusion
  • ”This might accelerate next year into a proposal. It’s too early to say. I think we are going to take a little more time to have a concrete proposal” for a CBDC, Colman said